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Why did Ding ring Jeff?

In a recent episode of his car show The Grand Tour Jeremy Clarkson pointed out that Buckingham Palace was no longer the top UK attraction for Chinese tourists. More popular than the British queen’s main residence, he exclaimed, was Bicester Village, a vast shopping centre in Oxfordshire where Chinese visitors load up on discounted foreign brands. Clarkson’s show is made by Amazon, which is somewhat ironic. That’s because the e-commerce giant wants more of that overseas consumer spending to be made on its own platform rather than at places like Bicester.

Amazon views this as a massive opportunity, so much so that it is considering a local merger. According to Caijing magazine, Chinese internet firm NetEase has proposed to combine its cross-border shopping platform Kaola with the China arm of Seattle-based Amazon. They are exploring the option of an equity swap.

“The export-from-China service will likely stay in Amazon, but the import division will be folded into Kaola, which is then spun off in an initial public offering,” wrote Caijing.

Both companies declined to comment but one obvious advantage is the increase in market share. As of the end of 2018, Kaola was the second largest player in China’s e-commerce market for imported goods with a 24.5% share, while Amazon ranked fifth with 6%, data from consultancy Analysys shows. Together their command over the market would be comparable to that of Alibaba’s Tmall, which held 31.7% of the pie in the same period.

For Amazon, the merger presents another opportunity to turn around its fortunes in China. It entered the market in 2004 with its $75 million acquisition of Joyo.com, one of the earliest tech ventures started by Xiaomi’s founder Lei Jun. But the American internet giant has seen its market share steadily decline.

In 2015 Amazon resorted to opening an online store on Tmall (see WiC274). Its own operation centres in China, which are responsible for warehousing and order fulfilment, have dropped in number from 15 to less than a dozen, the 21CN Business Herald reported. One problem: Amazon has proven far less agile than local competitors. “From strategy to the functionality of its webpage – everything has to be approved by the headquarters [in the US],” a source told 21CN.

A more onerous regulatory environment in India is also forcing Amazon to pivot back to China and rethink its strategy. In December the Indian government published a circular barring e-commerce firms from forming exclusive selling arrangements with vendors and offering steep discounts to consumers based on those deals. Over 400,000 items on Amazon’s Indian site could temporarily disappear because of the new rule, reported the New York Times. Those items made up close to a third of Amazon’s estimated $6 billion in annual sales in India.

“Amazon protested the new rules, but it clearly needed to focus on other growth markets besides India. China, which it has mostly neglected over the past 15 years, seemed like a logical choice since it already established a toehold in the market,” wrote International Business Times.

The failure of Amazon Prime to take off in China also suggests the US company needs to improve its capabilities in express delivery – an area that NetEase could assist given the partnership it signed in October with delivery company Deppon.

For Kaola, established in 2015, Amazon’s foreign supply chain is the most desirable asset, especially after a scandal late last year that alleged that fake Canada Goose parkas were sold on its platform (see WiC438). “It is not known whether Kaola was guilty of selling counterfeit goods, yet the incident has already fanned distrust among consumers,” commented China Economy Net, noting that Amazon could help Kaola shore up its reputation.

“NetEase’s e-commerce business is still at a stage where strong investment is needed and cash has to be burnt. The collaboration with Amazon China could reduce costs in many aspects including expanding product categories, acquiring customers and building logistics infrastructure,” said Wallstreetcn.com, a news portal. Meanwhile the ongoing crackdown on the video gaming sector by the Chinese government has hurt NetEase’s core source of revenue – and likely persuaded founder Ding Lei that he needs to accelerate the growth of his e-commerce business instead.

Neither Ding nor Jeff Bezos are known as prolific dealmakers, but if the Caijing report is right they evidently see this tie-up as a win-win.

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